Barclays: U.S. Will Likely ‘Temporarily’ Go Over Fiscal Cliff

By Michael Aneiro

After saying the worst outcome for the fiscal cliff was a status quo election, Barclays strategists now say they don’t believe there’s enough time to come to a comprehensive agreement before year-end, and that “the likelihood of going off the cliff temporarily is high.” In the meantime, Treasury rates will probably fall further. From Barclays:

Unless one side softens its stance, the chances of going off the cliff (at least temporarily) are higher than the bond markets were prepared for. The Democrats probably have the upper hand in these negotiations. For example, if the entire cliff hits, upper income tax cuts will expire. While lower/middle income tax rates would also rise, these could be reversed by a new round of targeted tax cuts, which may have bipartisan support. Extension of the debt ceiling could perhaps be a bargaining point for the Republicans. But this will not be required until the middle of Q1, which means the debt ceiling can be a bargaining chip only if the negotiations drag into Q1. In other words, unless the Republican House pro-actively agrees to concessions (or the president offers to compromise on high income tax rates), the chances of the cliff temporarily hitting are high.

What about the chances of a longer-term grand bargain that avoids the fiscal cliff? We believe that there is not enough time to come to such a comprehensive agreement before the end of the year. What about the prospect of a temporary extension of all expiring provisions for six months or so, while a grand bargain is negotiated? This is not out of the question, but we will not know until late December. And even in the event of a short-term extension, the bond market is unlikely to sell off, as investors start counting down to the new deadline.

In other words, we expect uncertainty to remain elevated in the next month. We feel that the rate rally has room to run; our forecast is for 10s to end the year at 1.5%, partly because continued, open-ended quantitative easing should push real rates lower. We expect 7s-30s curve to flatten and long-end swap spreads to widen….[O]n the securitized side, continued Fed buying should provide support to the agency basis.

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There are 2 comments

NOVEMBER 12, 2012 5:13 P.M.

Douglas Rife wrote:

President Obama will not sign any bill extending the Bush tax cuts, even for 6 months, even for 1 month. He won the election by a large electoral margin including now the state of Florida. Signing any such bill would signal surrender to the House Republicans who would act accordingly. We will go over the fiscal cliff but there will be a resolution early in 2013 after the Bush tax cuts expire.

DECEMBER 3, 2012 10:16 A.M.

Silas Longshot wrote:

What? Really? We're going off the cliff temporarily? Isn't that kind of like being temporarily dead? Or your house is 'temporarily' burned to the ground, at best?
Oh, this is going to be such fun!
Prepare while you can.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.